A week that began ominously with the Federal Reserve taking extraordinary steps to prop up the global financial system ended on an upbeat note today as battered financial stocks rallied on hope that the central bank’s actions would work.

Commodity prices tumbled for a second day, and the dollar strengthened. Those moves could ease inflationary pressures and give the central bank wiggle room to keep cutting interest rates to stave off a recession.

The Dow Jones industrial average rose 261.66 points, or 2.2%, to 12,361.32. With the market closed Friday for Good Friday, the index ended up 3.4% for the week, its best showing in more than a month.

The Standard & Poor’s 500 index climbed 31.09 points, or 2.4%, to 1,329.51. It was up 3.2% for the week.

The Nasdaq composite index moved ahead 48.15 points, or 2.2%, to 2,258.11. It advanced 2.1% for the week.

The day’s bright spot was the financial sector as the S&P 500 financial index shot up 6.9%. Citigroup jumped 10%. Merrill Lynch surged 13% despite an analyst’s prediction that the brokerage may have to take $8 billion in first-quarter write-downs of mortgage-related holdings and other assets.

Giving the sector a boost was an announcement by the Fed that it would accept a wider array of assets as collateral from investment banks seeking loans, which the market interpreted as another sign that the central bank is committed to stabilizing Wall Street.

“The Fed is determined to avoid a financial disaster,” said Robert Bissell, president of Wells Capital Management in Los Angeles. Investors believe “the Fed is taking a series of steps that are starting to take hold.”

The Fed’s actions – including the direct extension of credit to troubled investment banks as well as cutting rates – seemed to be doing the trick. No investment banks had credit problems this week on the scale of those at troubled Bear Stearns, which said Sunday that it would sell itself at a bargain-basement price to JPMorgan Chase.

In addition, mortgage rates eased this week. That decline, if sustained, could lift the housing market and the broader economy. The average rate for 30-year fixed mortgages fell to 5.87% from 6.13% last week, Freddie Mac said.

In the wake of the Fed’s actions, now is a good time to buy bank stocks, Richard X. Bove, an analyst at Punk Ziegel & Co., wrote in a research report issued today.

“The last time an opportunity of this nature existed to buy bank stocks this cheap was in 1990,” Bove wrote. “The next time will be in 20 years. This is a once-in-a-generation opportunity.”

In a sign of the market’s strength, bad news from commercial finance company CIT Group and Swiss banking giant Credit Suisse Group failed to interrupt the day’s rally.

CIT’s shares fell $2.01, or 17%, to $9.63, after the company said it was tapping an emergency credit line because it couldn’t obtain short-term financing in the capital markets.

Bucking the trend of better-than-expected earnings from investment banks, Credit Suisse said it would suffer a first-quarter loss.

But experts noted that the market still hasn’t been able to string together several up days in a row. This week, the Dow surged 420 points Tuesday and fell 293 points Wednesday before reclaiming most of that loss today.

“Tremendous volatility has one source and only one source, and that’s uncertainty,” said John Bollinger, head of Bollinger Capital Management in Manhattan Beach. “People are uncertain about everything. They’re uncertain about real estate, about stocks, about bonds. And now they’re even uncertain about commodities.”

Commodity prices tumbled across the board for a second day. The Reuters/Jefferies CRB index of 19 commodities sank 1.7%. For the week, the index plunged 8.3%, its steepest drop in more than half a century. One week ago, the gauge closed at a record high, up 17% since the start of the year.

Crude oil for May delivery eased 70 cents today to $104.48 a barrel. Only days after topping $1,000 an ounce, gold tumbled $25.10 to $919.60. Wheat prices fell more than 8% and silver prices descended almost 9%.

Despite the continued decline in commodities, natural-resource shares ended mixed after tumbling Wednesday.

walter.hamilton@latimes.com